[Technical doubt]: Cash sweep and mandatory amortization

Hi all,

Please ignore my title; I am currently preparing for LBO tests and wanted clarity on the following doubts:

(A) Cash sweep:

(i) When the requirement says 50% cash sweep on TL B, do you do (a) minimum of (opening balance, cash available for sweep) * 50%, or (b) minimum of (opening balance, cash available for sweep * 50%)? Essentially, is the 50% applicable to remaining TL or free cash available?

(ii) In line with above, how do you interpret 100% cash sweep for TL A and 50% on TL B? Is it saying use free cash to pay 100% of TL A first and then any excess cash will be used to pay 50% of TLB?

(B) Mandatory amortization:

When the question says 1% mandatory amortization, is it 1% of the original borrowed amount (say US$100), or 1% of the opening balance for that year?

(C) Term of debt:

In a 5-year hold period, if TL A has a term of 5 years, and TL B has a term of 7 years:

(i) Unless the question says anything about mandatory amortization, you can assume that the debt is only paid at exit?

(ii) How would the treatment differ for the two loans at exit given one has to be repaid at the time of exit and the other has to be repaid after the exit? 

Super grateful if anybody could please help with these.


A(i): 100% (or 50%) of the free cash flow for the year (not necessarily the balance sheet cash, although you might use balance sheet cash to voluntarily pay down debt if the leverage covenant is not calculated net of cash). This is a defined term in the credit agreement and its calculation may vary, but you should think of it as financing cash flows after you've paid mandatory amort (for all loans) and interest. This is why in a cash flow sweep model your ending cash will be at the minimum cash level.

A(ii): your interpretation is correct.

B: Mandatory amort is expressed as a % of the initial principal of the debt, so on a million-dollar loan with 1% amortization, amortization would be $10k per year.

C(i):  Correct.

C(ii): For a modeling test, you should assume that all debt is paid off at exit so that the buyer can employ its own capital structure.



OP here; many thanks for the response. Super helpful. Just to confirm on A(ii), I will use 100% of excess cash to pay TL A and then once TL A is paid, use 50% of the excess cash to pay 100% of TL B as and when I can? (and not pay only 50% of TL B)? And in a corner case, if TL A is paid and there is still excess cash left in the year, I will use only 50% of it to pay TL B?



Thank you, this is helpful. On your point about assuming debt should be paid down at exit, if we’re given a case where there isn’t enough FCF to pay down the entire principal is it ok to assume that the facilities are rolled (extended)?


This question doesn't make sense to me. If you don't have enough FCF to pay down the debt, you would simply pay off remaining principal with transaction proceeds (with that being a deduction to equity). Are you asking what happens if the transaction proceeds do not exceed the outstanding principal of the debt? In that case, equity is wiped and debt would own the company.

Most Helpful

Assuming that you have a 100% cash flow sweep on TLA and a 50% sweep, you have the following potential states assuming amortization of 1% (if you set these up as nested IF statements, you'll probably get dinged; use -MIN functionality):

(1) TLA has positive balance > 100% of FCF from the year (calling this "ECF" = "excess cash flow"); 100% of ECF pays down TLA.

(2) TLA has positive balance < 100% of ECF; pay down 100% of outstanding principal, and 50% of remaining ECF pays TLB [you are assuming that 100% of any TLA ECF payment is a deduction from TLB's ECF calc; I can't imagine it working otherwise, but as you get more structurally complex (e.g., topco/holdco debt), weird stuff starts to happen more frequently].

(3) TLA has zero balance, TLB has positive balance > 50% of ECF; 50% of ECF pays down TLB.

(4) TLA has zero balance, TLB has positive balance < 50% of ECF; pay down TLB entirely, remaining cash flow goes to the balance sheet.



I quickly ran the numbers, but just to confirm - even in scenario (3), remaining cash flow will go to the balance sheet, right? For example, if TL B opening balance is US$100, and ECF for TL B is US$40, with a 50% sweep, you would only pay down US$20 for TL B (such that closing balance is US$80), and the remaining US$20 of ECF will go to the BS (despite there being an outstanding TL B)?

In my mind, the investors can justify this by saying they'd want to generate some excess cash to dividend / do M&A (assuming revolver is already hit). Would be great if you can confirm.



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